WASHINGTON -- Inflation should rise only modestly in the second half of the year, but the economy is nearing a "zone" where capacity constraints could ignite more price pressures than currently expected, a senior Treasury Department official predicted yesterday.
"We are nearing the zone ... where some additional inflationary pressures might be felt," said Alicia Munnell, Treasury assistant secretary for economic policy.
She made the statement just before Treasury officials met behind closed doors with the Public Security Association's Treasury borrowing advisory committee. The panel of Wall Street executives meets each quarter to advise the Treasury on borrowing strategies.
Minutes of the meeting will be released today at the Treasury's quarterly refunding press conference.
In its mid-session budget review last month, the Clinton Administration predicted an inflation rate of 2.9% this year and 3.2% next year, based on fourth quarter-to-fourth quarter gains in the consumer price index.
Munnell was quick to say that prospects of continued low inflation are still very good. She said excess productive capacity still exists in the economy and that wage pressures are still essentially "absent." She also noted that a large number of skilled workers are still unemployed.
Munnell said the Treasury expects growth between 3% and 3.5% during the second half of the year. "Good growth will continue" despite inventory building in the second quarter, she said.
But Munnell noted that growth must begin to slow, otherwise inflation will begin to heat up. "Growth must eventually taper off," she said, noting that this has already begun with slower growth in the first half of 1994 compared with the second half of last year.
In addition, Jill Ouseley, director of market finance of the Treasury, said that Japan's total holdings of U.S. Treasury securities grew to $154 billion at the end of May from $143 billion at the end of last year.